Study Highlights Strengths, Weaknesses of Disability Programs

Employees may fail to understand when supplemental plans make financial sense

By Stephen Miller, CEBS
9/18/2013

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Long-term disability insurance plans supplement a portion of an employee’s income over an extended period for a disabling condition. More than eight of 10 organizations (84 percent) report offering a group long-term disability plan for their employees, according to the 2013 Employer Perspectives on Disability Benefits survey.

The poll, taken in July and August 2012 by the Society for Human Resource Management (SHRM) and the MassMutual Financial Group, questioned randomly selected SHRM members. The findings, released in September 2013, are presented in the following reports:

Premiums paid with pretax vs. post-tax dollars. Overall, 73 percent of respondents said their employees pay nothing for their LTD plans. At organizations where workers pay the premiums, 69 percent reported they do so with post-tax dollars; 25 percent, with pretax dollars; and 5 percent, with a combination of both.

Wait time to receive benefits. The majority of organizations (87 percent) reported that employees, once they become disabled, must wait 60 or more days before they can start receiving benefits under the group LTD plan.

Adequacy of benefits. Eighty-threepercent of organizations believe they are providing an adequate maximum benefit amount. Among respondents who said the maximum benefit amount is inadequate, 45 percent said it fails to sufficiently cover highly compensated employees, and 39 percent said it does not provide most employees with enough money to live on.

Variable Compensation and ‘Buy-up’ Coverage

Currently, less than a quarter of employers (22 percent) seek to replace income from variable compensation (e.g., bonuses and incentive pay) in their LTD plan. The law firm/legal services, financial services and wholesale/retail trade industries were more likely to include variable compensation in the income that their plan protects.

By excluding variable compensation from replacement-income determinations, “Coverage under traditional long-term disability group plans may not be enough, especially for executives and employees working on commission,” observed Evren Esen, manager of SHRM’s Survey Research Center. HR professionals need to consider supplemental coverage for highly compensated employees, she added, as these options “could provide an edge when recruiting and retaining a talented workforce.”

One solution might be to offer buy-up coverage, which provides workers with a base level of employer-paid LTD insurance plus the flexibility to add more coverage based on their financial situation. However, only 21 percent of surveyed organizations offer supplemental buy-up coverage: 16 percent offer it to all employees, and 5 percent offer it to select employees.

And among companies that provide buy-up coverage, 77 percent reported that less than 50 percent of their employees chose to purchase it.

“Employees may decline to purchase supplemental long-term disability insurance because they do not see its value, especially if they must pay for it out-of-pocket,” said Esen. “However, they may not fully understand what these plans cover and when supplemental plans may make sound financial sense, and it will be up to HR professionals to communicate what kind of assistance their benefits can provide their employees.”

Program and Carrier Satisfaction

While three-quarters of organizations said they evaluate their LTD program annually, only 15 percent are considering changes to the program. The most often-cited changes that employers are considering are:

Increasing the benefit amount.

Raising the monthly maximum.

Providing different classes of employees with different benefit levels.

More than one-third of organizations (36 percent) have switched LTD carriers in the past three years. Among those that switched, the top reasons were:

Cost of the plan.

Lower administrative fees.

Ease of administration.

An advisor’s recommendation.

Additional features/services were available.

Overall, 60 percent of respondents said their employers view their LTD program as an extremely important or very important element of their benefits offerings. The respondents believe that employees’ opinions of LTD benefits were slightly lower: Just under half (46 percent) consider LTD programs extremely or very important to their employees.

“There is a need for HR to educate employees about the role that long-term disability benefits play in employee health and financial wellness,” said Esen. “Highlighting the value of each benefit an organization offers has implications for employee retention and recruitment.”

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